Islamic banking

ISLAMIC BANKING TY.BMS

PREFACE

The Islamic banking experiment is still new and is still in the early
stage of application. So it is not surprising that members of the public have
many questions to ask as they are keen on understanding Islamic banking
principles and interested in dealing with Islamic institutions. The Islamic
banking experiment is not an innovation but is indeed a continuation of
economic thought that has prevailed and survived for many years during which
it proved its success in the filed of practical application for many centuries
during the early Islamic era. Islamic economic thought has been characterized
by the continuation and variety of its interpretation and development of its tools.
During the last fourteen years Islamic banks underwent a number of tests, some
of which were fairly difficult that could not be overcome by well-established
banks which rely on usury in their transactions. However, with the grace of
God, foresight of Islamic bankers and hard work of the bank employees such
tests were successfully overcome which proves the sound principles and
foundations of the Islamic banking experiment. Since the problems faced by
certain Islamic banks influence other similar banks either in a negative or
positive manner. Such problems also influence the Islamic economic pursuits in
general, and the activities of Islamic banks wherever, and the activities of
Islamic banks where they based in particular. Therefore, there is a need for
Islamic banks to adopt a position, reflecting the unity and solidarity of Muslims
and demonstrating their profound belief. Their attitude is one which reflects
their common destiny and their pursuit of an economic and financial strategy

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that is based upon their Islamic religion which regulates, in a comprehensive
way, their financial life. but it is a concept that has been put in practice.
Nowadays Islamic banking.
. There are Islamic banks effectively operating in three continents of the world.
As they entered the second decade, the Islamic banking experience has proved
its existence in the financial activities involving both the private and public
sectors.

Through the adoption of Islamic finance methods, they have been able to
introduce financial tools that are acceptable in today's world and these facilities
are less burdensome to the owners of development projects. Through
encouraging participation in projects, Islamic banks have highlighted the key to
Third World developing efforts. Short term finance aiming at making secure
quick profit that is remote from accepting any risks is not in any way
appropriate for development. Without participation in risks, Western Europe for
example would not have accomplished this level of development nor would the
dreams of the earlier generation of the Japanese people have become a reality.
Islamic economists look forward to establishing a dynamic global economy in
which capital interacts with human efforts and thought without depending on
rates of interest fixed well in advance. With this aspiration, the soundness of
which is confirmed by many western and eastern thinkers, the whole world will
enjoy greater economic prosperity. This project throws some light on the
activities of Islamic banks while outlining the philosophy of these activities.

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• OBJECTIVES TO STUDY:

1. To know about ISLAMIC BANKING.
2. To know whether Islamic Banking will be beneficial for the country in
future.
3. To know about Islamic finance sector.
4. To know about development and growth in Islamic banking.
5. To know whether Islamic Banking will be beneficial for the

customer in future.

• METHODOLOGY
1. Reviewed secondary sources of data available through
relevant books, periodicals, internet, relevasnt articles in the
newspapers etc.

2. Primary research was also conducted through a field visit to
Islamic Research Foundation (IRF) at Sandhurst Road, Mumbai.

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CH. 1 . Islamic banking

Islamic banking refers to a system of banking or banking activity that is
consistent with the principles of Islamic law (Sharia) and its practical
application through the development of Islamic economics. Sharia prohibits the
payment of fees for the renting of money (Riba, usury) for specific terms, as
well as investing in businesses that provide goods or services considered
contrary to its principles (Haraam, forbidden). While these principles were used
as the basis for a flourishing economy in earlier times, it is only in the late 20th
century that a number of Islamic banks were formed to apply these principles to
private or semi-private commercial institutions within the Muslim community.
•

• History of Islamic banking Classical Islamic banking

During the Islamic Golden Age, early forms of proto-capitalism and free
markets were present in the Caliphate, where an early market economy and an
early form of mercantilism were developed between the 8th-12th centuries,
which some refer to as "Islamic capitalism". A vigorous monetary economy was
created on the basis of the expanding levels of circulation of a stable high-value
currency (the dinar) and the integration of monetary areas that were previously
independent.

A number of innovative concepts and techniques were introduced in early
Islamic banking, including bills of exchange, the first forms of partnership
(mufawada) such as limited partnerships (mudaraba), and the earliest forms of
capital (al-mal), capital accumulation (nama al-mal), cheques, promissory
notes, trusts (see Waqf), startup companies, transactional accounts, loaning,
ledgers and assignments Organizational enterprises similar to corporations
independent from the state also existed in the medieval Islamic world, while the
agency institution was also introduced. Many of these early capitalist

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concepts were adopted and further advanced in medieval Europe from the 13th
century onwards.

• Riba

The definition of riba in classical Islamic jurisprudence was "surplus
value without counterpart." or "to ensure equivalency in real value" and that
"numerical value was immaterial." During this period, gold and silver currencies
were the benchmark metals that defined the value of all other materials being
traded. Applying interest to the benchmark itself (ex natura sua) made no
logical sense as its value remained constant relative to all other materials: these
metals could be added to but not created (from nothing).Applying interest was
acceptable under some circumstances. Currencies that were based on guarantees
by a government to honor the stated value (i.e. fiat currency) or based on other
materials such as paper or base metals were allowed to have interest applied to
them. When base metal currencies were first introduced in the Islamic world, no
jurist ever thought that "paying a debt in a higher number of units of this fiat
money was riba" as they were concerned with the real value of money
(determined by weight only) rather than the numerical value. For example, it
was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of
equal aggregate weight (i.e., the value in terms of weight had to be same
because all makes of coins did not carry exactly similar weight).

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• Modern Islamic banking

The first modern experiment with Islamic banking was undertaken in
Egypt under cover without projecting an Islamic image for fear of being seen as
a manifestation of Islamic fundamentalism that was anathema to the political
regime. The pioneering effort, led by Ahmad Elnaggar, took the form of a
savings bank
based on
profit-sharing
in the Egyptian
town of Mit
Ghamr in
1963. This
experiment
lasted until
1967 (Ready
1981), by
which time
there were nine such banks in the country.

In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank
which, till date, is still in business in Egypt. In 1975, the Islamic Development
Bank was set-up with the mission to provide funding to projects in the member
countries. The first modern commercial Islamic bank, Dubai Islamic Bank,
opened its doors in 1975. In the early years, the products offered were basic and
strongly founded on conventional banking products, but in the last few years the

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industry is starting to see strong development in new products and
services.Islamic Banking is growing at a rate of 10-15% per year and with signs
of consistent future growth. Islamic banks have more than 300 institutions
spread over 51 countries, plus an additional 250 mutual funds that comply with
the Islamic principles. The relative stability of Islamic banking institutions in
current recession has gained it attention. Even The Vatican said banks should
look at the rules of Islamic finance to restore confidence amongst their clients at
a time of global economic crisis. The World Islamic Banking Conference, held
annually in Bahrain since 1994, is internationally recognized as the largest and
most significant gathering of Islamic banking and finance leaders in the world.

• Principles

Islamic banking has the same purpose as conventional banking except
that it operates in accordance with the rules of Shariah, known as Fiqh al-
Muamalat (Islamic rules on transactions). The basic principle of Islamic
banking is the sharing of profit and loss and the prohibition of riba (usury).
Amongst the common Islamic concepts used in Islamic banking are profit
sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah),
cost plus (Murabahah), and leasing (Ijarah).In an Islamic mortgage
transaction, instead of loaning the buyer money to purchase the item, a bank
might buy the item itself from the seller, and re-sell it to the buyer at a profit,
while allowing the buyer to pay the bank in installments. However, the fact that
it is profit cannot be made explicit and therefore there are no additional penalties
for late payment. In order to protect itself against default, the bank asks for strict
collateral. The goods or land is registered to the name of the buyer from the start
of the transaction. This arrangement is called Murabaha. Another approach is
EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle
loans for vehicles in a similar way (selling the vehicle at a higher-than-market
price to the debtor and then retaining ownership of the vehicle until the loan is

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paid).An innovative approach applied by some banks for home loans, called
Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The
bank and borrower forms a partnership entity, both providing capital at an
agreed percentage to purchase the property. The partnership entity then rent out
the property to the borrower and charges rent. The bank and the borrower will
then share the proceed from this rent based on the current equity share of the
partnership. At the same time, the borrower in the partnership entity also buys
the bank's share on the property at agreed installments until the full equity is
transferred to the borrower and the partnership is ended. If default occurs, both
the bank and the borrower receives the proceeds from an auction based on the
current equity. This method allows for floating rates according to current market
rate such as the BLR (base lending rate), especially in a dual-banking system
like in Malaysia.

There are several other approaches used in business deals. Islamic banks lend
their money to companies by issuing floating rate interest loans. The floating
rate of interest is pegged to the company's individual rate of return. Thus the
bank's profit on the loan is equal to a certain percentage of the company's
profits. Once the principal amount of the loan is repaid, the profit-sharing
arrangement is concluded. This practice is called Musharaka. Further,
Mudaraba is venture capital funding of an entrepreneur who provides labor
while financing is provided by the bank so that both profit and risk are shared.
Such participatory arrangements between capital and labor reflect the Islamic
view that the borrower must not bear all the risk/cost of a failure, resulting in a
balanced distribution of income and not allowing lender to monopolize the
economy and finally, Islamic banking is restricted to Islamically acceptable
deals, which exclude those involving alcohol, pork, gambling, etc. Thus ethical
investing is the only acceptable form of investment, and moral purchasing is
encouraged. In theory, Islamic banking is an example of full-reserve banking,

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with banks achieving a 100% reserve ratio. However, in practice, this is not the
case, and no examples of 100 per cent reserve banking are observed.

Islamic banks have grown recently in the Muslim world but are a very
small share of the global banking system. Micro-lending institutions founded by
Muslims, notably Grameen Bank, use conventional lending practices and are
popular in some Muslim nations, especially Bangladesh, but some do not
consider them true Islamic banking. However, Muhammad Yunus, the founder
of Grameen Bank and microfinance banking, and other supporters of
microfinance, argue that the lack of collateral and lack of excessive interest in
micro-lending is consistent with the Islamic prohibition of usury (riba)

• PRINCIPLES OF INVESTMENT IN ISLAM

Let us after all this try to see the basis on which Islamic investment is
preferable. When we asked for Islamic banks to be established, some interest
taking bankers suggested opening a branch for Islamic transactions and said that
there was not need for Islamic banks to be established. They say this so easily,
inferring that
Islamic transactions are shallow and easy to shrug off and as if the mere opening
of an Islamic branch would be acceptable. By doing this they are trying to
exploit us and do not fully understand Islam. Islamic investments are base
mainly on good faith not dealing with the taking and giving of usury, not trading
nor participating in the sale of any prohibited goods and no excessive mark-up
by exploitation of the market, as these things are harmful to society. Just by not
dealing with usury does not automatically make any bank an Islamic bank is
there is not certainty that its other dealings are in accordance with the Islamic
concepts. Islam must be taking as a whole, all Islamic orders must be observed,
and any Muslim cannot live a dual personality.

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It might be easy to wear more than one hat in the normal business day, but when
comes to principles and particularly religious principles only one hat could be
worn.

• Shariah advisory concil / consultany

Islamic banks and banking institutions that offer Islamic banking products
and services (IBS banks) are required to establish Shariah advisory
committees/consultants to advise them and to ensure that the operations and
activities of the bank comply with Shariah principles. On the other hand, there
are also those who believe that no form of banking can ever comply with the
shariah.[16]In Malaysia, the National Shariah Advisory Council, which
additionally set up at Bank Negara Malaysia (BNM), advises BNM on the
Shariah aspects of the operations of these institutions and on their products and
services. (See: Islamic banking in Malaysia)A number of Sharia advisory firms
(like BMB Islamic) have now emerged to offer Sharia advisory services to the
institutions offering Islamic financial services.

• Bai' al-Inah (Sale and Buy Back Agreement)

The financier sells an asset to the customer on a deferred-payment basis,
and then the asset is immediately repurchased by the financier for cash at a
discount. The buying back agreement allows the bank to assume ownership over
the asset in order to protect against default without explicitly charging interest in
the event of late payments or insolvency. Some scholars believe that this is not
compliant with Shariah principles.

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• Bai' Bithaman Ajil (Deferred Payment Sale)

This concept refers to the sale of goods on a deferred payment basis at a
price, which includes a profit margin agreed to by both parties. This is similar to
Murabahah, except that the debtor makes only a single installment on the
maturity date of the loan. By the application of a discount rate, an Islamic bank
can collect the market rate of interest.

• Bai muajjal (Credit Sale)

Literally bai muajjal means a credit sale. Technically, it is a financing
technique adopted by Islamic banks that takes the form of murabaha muajjal.
It is a contract in which the bank earns a profit margin on the purchase price and
allows the buyer to pay the price of the commodity at a future date in a lump
sum or in installments. It has to expressly mention cost of the commodity and
the margin of profit is mutually agreed. The price fixed for the commodity in
such a transaction can be the same as the spot price or higher or lower than the
spot price.

• Mudarabah (Profit Sharing)

Mudarabah is an arrangement or agreement between the bank, or a capital
provider, and an entrepreneur, whereby the entrepreneur can mobilize the funds
of the former for its business activity. The entrepreneur provides expertise, labor
and management. Profits made are shared between the bank and the
entrepreneur according to predetermined ratio. In case of loss, the bank loses the
capital, while the entrepreneur loses his provision of labor. It is this financial
risk, according to the Shariah, that justifies the bank's claim to part of the profit.
The profit-sharing continues until the loan is repaid. The bank is compensated
for the time value of its money in the form of a floating rate that is pegged to the
debtor's profits.

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• Murabahah (Cost Plus)

This concept refers to the sale of goods at a price, which includes a profit
margin agreed to by both parties. The purchase and selling price, other costs,
and the profit margin must be clearly stated at the time of the sale agreement.

The bank is compensated for the time value of its money in the form of the
profit margin. This is a fixed-income loan for the purchase of a real asset (such
as real estate or a vehicle), with a fixed rate of profit determined by the profit
margin. The bank is not compensated for the time value of money outside of the
contracted term (i.e., the bank cannot charge additional profit on late payments);
however, the asset remains as a mortgage with the bank until the Murabaha is
paid in full.This type of transaction is similar to rent-to-own arrangements for
furniture or appliances that are very common in North American stores.

• Musawamah

Musawamah is the negotiation of a selling price between two parties without
reference by the seller to either costs or asking price. While the seller may or
may not have full knowledge of the cost of the item being negotiated, they are
under no obligation to reveal these costs as part of the negotiation process. This
difference in obligation by the seller is the key distinction between Murabaha
and Musawamah with all other rules as described in Murabaha remaining the
same. Musawamah is the most common type of trading negotiation seen in
Islamic commerce.

• Bai salam

Bai salam means a contract in which advance payment is made for goods
to be delivered later on. The seller undertakes to supply some specific goods to
the buyer at a future date in exchange of an advance price fully paid at the time
of contract. It is necessary that the quality of the commodity intended to be
purchased is fully specified leaving no ambiguity leading to dispute.

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• Basic features and conditions of salam
1. The transaction is considered Salam if the buyer has paid the purchase
price to the seller in full at the time of sale. This is necessary so that the
buyer can show that they are not entering into debt with a second party
in order to eliminate the debt with the first party, an act prohibited under
Sharia.
2. The idea of Salam is to provide a mechanism that ensures that the seller
has the liquidity they expected from entering into the transaction in the
first place. If the price were not paid in full, the basic purpose of the
transaction would have been defeated. Muslim jurists are unanimous in
their opinion that full payment of the purchase price is key for Salam to
exist. Imam Malik is also of the opinion that the seller may defer
accepting the funds from the buyer fr two or three days, but this delay
should not form part of the agreement.
3. Salam can be effected in those commodities only the quality and
quantity of which can be specified exactly. The things whose quality or
quantity is not determined by specification cannot be sold through the
contract of salam. For example, precious stones cannot be sold on the
basis of salam, because every piece of precious stones is normally
different from the other either in its quality or in its size or weight and
their exact specification is not generally possible.
4. Salam cannot be effected on a particular commodity or on a product of a
particular field or farm. For example, if the seller undertakes to supply
the wheat of a particular field, or the fruit of a particular tree, the salam
will not be valid, because there is a possibility that the crop of that
particular field or the fruit of that tree is destroyed before delivery, and,
given such possibility, the delivery remains uncertain. The same rule is
applicable to every commodity the supply of which is not certain.
5. It is necessary that the quality of the commodity (intended to be
purchased through salam) is fully specified leaving no ambiguity which

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may lead to a dispute. All the possible details in this respect must be
expressly mentioned.
6. It is also necessary that the quantity of the commodity is agreed upon in
unequivocal terms. If the commodity is quantified in weights according
to the usage of its traders, its weight must be determined, and if it is
quantified through measures, its exact measure should be known. What
is normally weighed cannot be quantified in measures and vice versa.
7. The exact date and place of delivery must be specified in the contract.
8. Salam cannot be effected in respect of things which must be delivered at
spot. For example, if gold is purchased in exchange of silver, it is
necessary, according to Shari'ah, that the delivery of both be
simultaneous. Here, salam cannot work. Similarly, if wheat is bartered
for barley, the simultaneous delivery of both is necessary for the validity
of sale. Therefore the contract of salam in this case is not allowed.

• Hibah (Gift)

This is a token given voluntarily by a debtor to a creditor in return for a
loan. Hibah usually arises in practice when Islamic banks voluntarily pay their
customers a 'gift' on savings account balances, representing a portion of the
profit made by using those savings account balances in other activities.It is
important to note that while it appears similar to interest, and may, in effect,
have the same outcome, Hibah is a voluntary payment made (or not made) at the
bank's discretion, and cannot be 'guaranteed.' However, the opportunity of
receiving high Hibah will draw in customers' savings, providing the bank with
capital necessary to create its profits; if the ventures are profitable, then some of
those profits may be gifted back to its customers as Hibah.

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• Ijarah

Ijarah means lease, rent or wage. Generally, Ijarah concept means selling
benefit or use or service for a fixed price or wage. Under this concept, the Bank
makes available to the customer the use of service of assets / equipments such as
plant, office automation, motor vehicle for a fixed period and price.

• Advantages of Ijarah

Ijarah provides the following advantages to the Lessee:Ijarah conserves
the Lessee' capital since it allows up to 100% financing.Ijarah gives the Lessee
the right to access the equipment on payment of the first installment.

This is important as it is the access and use (and not ownership) of equipment
that generates income.Ijarah arrangements aid corporate planning and budgeting
by allowing the negotiation of flexible termsIjarah is not considered Debt
Financing so it does not appear on the Lessee' Balance Sheet as a Liability. This
method of "off-balance-sheet" financing means that it is not included in the Debt
Ratios used by bankers to determine financing limits. This allows the Lessee to
enter into other lease financing arrangements without impacting his overall debt
rating.All payments towards Ijarah contracts are treated as operating expenses
and are therefore fully tax-deductible. Leasing thus offers tax-advantages to for-
profit operations.Many types of equipment (i.e computers) become obsolete
before the end of their actual economic life. Ijarah contracts allow the transfer of
risk from the Lesse to the Lessor in exchange for a higher lease rate. This higher
rate can be viewed as insurance against obsolescence.If the equipment is used
for a relatively short period of time, it may be more profitable to lease than to
buy.If the equipment is used for a short period but has a very poor resale value,
leasing avoids having to account for and depreciate the equipment under normal
accounting principles.

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• Ijarah Thumma Al Bai' (Hire Purchase)

Parties enter into contracts that come into effect serially, to form a
complete lease/ buyback transaction. The first contract is an Ijarah that outlines
the terms for leasing or renting over a fixed period, and the second contract is a
Bai that triggers a sale or purchase once the term of the Ijarah is complete. For
example, in a car financing facility, a customer enters into the first contract and
leases the car from the owner (bank) at an agreed amount over a specific period.
When the lease period expires, the second contract comes into effect, which
enables the customer to purchase the car at an agreed to price.The bank
generates a profit by determining in advance the cost of the item, its residual
value at the end of the term and the time value or profit margin for the money
being invested in purchasing the product to be leased for the intended term. The
combining of these three figures becomes the basis for the contract between the
Bank and the client for the initial lease contract.

This type of transaction is similar to the contractum trinius, a legal maneuver
used by European

bankers and merchants during the Middle Ages to sidestep the Church's
prohibition on interest bearing loans. In a contractum, two parties would enter
into three concurrent and interrelated legal contracts, the net effect being the
paying of a fee for the use of money for the term of the loan. The use of
concurrent interrelated contracts is also prohibited under Shariah Law.

• Ijarah-Wal-Iqtina

A contract under which an Islamic banks provides equipment, building, or
other assets to the client against an agreed rental together with a unilateral
undertaking by the bank or the client that at the end of the lease period, the
ownership in the asset would be transferred to the lessee. The undertaking or the
promise does not become an integral part of the lease contract to make it

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conditional. The rentals as well as the purchase price are fixed in such manner
that the bank gets back its principal sum along with profit over the period of
lease.

• Musharakah (Joint Venture)

Musharakah is a relationship between two parties or more, of whom
contribute capital to a business, and divide the net profit and loss pro rata. This
is often used in investment projects, letters of credit, and the purchase or real
estate or property. In the case of real estate or property, the bank assess an
imputed rent and will share it as agreed in advance. All providers of capital are
entitled to participate in management, but not necessarily required to do so. The
profit is distributed among the partners in pre-agreed ratios, while the loss is
borne by each partner strictly in proportion to respective capital contributions.
This concept is distinct from fixed-income investing (i.e. issuance of loans).

• Qard Hassan (Good Loan)

This is a loan extended on a goodwill basis, and the debtor is only required
to repay the amount borrowed. However, the debtor may, at his or her
discretion, pay an extra amount beyond the principal amount of the loan
(without promising it) as a token of appreciation to the creditor. In the case that
the debtor does not pay an extra amount to the creditor, this transaction is a true
interest-free loan. Some Muslims consider this to be the only type of loan that
does not violate the prohibition on riba, since it is the one type of loan that truly
does not compensate the creditor for the time value of money.

• Sukuk (Islamic Bonds)

Sukuk is the Arabic name for a financial certificate but can be seen as an
Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are
not permissible in Islam. Hence, Sukuk are securities that comply with the

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Islamic law (Shariah) and its investment principles, which prohibit the charging
or paying of interest. Financial assets that comply with the Islamic law can be
classified in accordance with their tradability and non-tradability in the
secondary markets.Conservative estimates suggest that over US$500 billion of
assets are managed according to Islamic investment principles.

• Takaful (Islamic Insurance)

Takaful is an alternative form of cover that a Muslim can avail himself
against the risk of loss due to misfortunes. Takaful is based on the idea that what
is uncertain with respect to an individual may cease to be uncertain with respect
to a very large number of similar individuals. Insurance by combining the risks
of many people enables each individual to enjoy the advantage provided by the
law of large numbers

• Wadiah (Safekeeping)

In Wadiah, a bank is deemed as a keeper and trustee of funds. A person
deposits funds in the bank and the bank guarantees refund of the entire amount
of the deposit, or any part of the outstanding amount, when the depositor
demands it. The depositor, at the bank's discretion, may be rewarded with Hibah
(see above) as a form of appreciation for the use of funds by the bank.

• Islamic equity funds.

Islamic investment equity funds market is one of the fastest-growing
sectors within the Islamic financial system. Currently, there are approximately
100 Islamic equity funds worldwide. The total assets managed through these
funds currently exceed US$5 billion and is growing by 12–15% per annum.
With the continuous interest in the Islamic financial system, there are positive

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signs that more funds will be launched. Some Western majors have just joined
the fray or are thinking of launching similar Islamic equity products.Despite
these successes, this market has seen a record of poor marketing as emphasis is
on products and not on addressing the needs of investors. Over the last few
years, quite a number of funds have closed down. Most of the funds tend to
target high net worth individuals and corporate institutions, with minimum
investments ranging from US$50,000 to as high as US$1 million. Target
markets for Islamic funds vary, some cater for their local markets, e.g., Malaysia
and Gulf-based investment funds. Others clearly target the Middle East and Gulf
regions, neglecting local markets and have been accused of failing to serve
Muslim communities.Since the launch of Islamic equity funds in the early
1990s, there has been the establishment of credible equity benchmarks by Dow
Jones Islamic market index (Dow Jones Indexes pioneered Islamic investment
indexing in 1999) and the FTSE Global Islamic Index Series. The Web site
failaka.com monitors the performance of Islamic equity funds and provide a
comprehensive list of the Islamic funds worldwide.

• Islamic laws on trading

The Qur'an prohibits gambling (games of chance involving money) and
insuring ones health or property (also a game of chance). The hadith, in addition
to prohibiting gambling (games of chance), also prohibits bayu al-gharar
(trading in risk, where the Arabic word gharar is taken to mean "risk" or
excessive uncertainty).

The Hanafi madhab (legal school) in Islam defines gharar as "that whose
consequences are hidden." The Shafi legal school defined gharar as "that whose
nature and consequences are hidden" or "that which admits two possibilities,
with the less desirable one being more likely." The Hanbali school defined it as
"that whose consequences are unknown" or "that which is undeliverable,

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whether it exists or not." Ibn Hazm of the Zahiri school wrote "Gharar is where
the buyer does not know what he bought, or the seller does not know what he
sold." The modern scholar of Islam, Professor Mustafa Al-Zarqa, wrote that
"Gharar is the sale of probable items whose existence or characteristics are not
certain, due to the risky nature that makes the trade similar to gambling." There
are a number of hadith that forbid trading in gharar, often giving specific
examples of gharhar transactions (e.g., selling the birds in the sky or the fish in
the water, the catch of the diver, an unborn calf in its mother's womb etc.).
Jurists have sought many complete definitions of the term. They also came up
with the concept of yasir (minor risk); a financial transaction with a minor risk
is deemed to be halal (permissible) while trading in non-minor risk (bayu al-
ghasar) is deemed to be haram. What gharar is, exactly, was never fully
decided upon by the Muslim jurists.

• Microfinance

Microfinance is a key concern for Muslims states and recently Islamic
banks also. Islamic microfinance tools can enhance security of tenure and
contribute to transformation of lives of the poor.

• Controversy

In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist
political party in Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a
protest walkout from the National Assembly of Pakistan against what they
termed derogatory remarks by a minority member on interest banking:Taking
part in the budget debate, M.P. Bhindara, a minority MNA [Member of the
National Assembly]...referred to a decree by an Al-Azhar University's scholar
that bank interest was not un-Islamic. He said without interest the country could

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not get foreign loans and could not achieve the desired progress. A
pandemonium broke out in the house over his remarks as a number of MMA
members...rose from their seats in protest and tried to respond to Mr Bhindara's
observations. However, they were not allowed to speak on a point of order that
led to their walkout.... Later, the opposition members were persuaded by a team
of ministers...to return to the house...the government team accepted the right of
the MMA to respond to the minority member's remarks.... Sahibzada Fazal
Karim said the Council of Islamic ideology had decreed that interest in all its
forms was haram in an Islamic society. Hence, he said, no member had the right
to negate this settled issue.[ Some Islamic banks generate profits by charging for
the time value of money, the common economic definition of Interest (Riba).
These institutions are criticized in some quarters of the Muslim community for
their lack of strict adherence to Sharia.The concept of Ijarah is used by some
Islamic Banks (the Islami Bank in Bangladesh, for example) to apply to the use
of money instead of the more accepted application of supplying goods or
services using money as a vehicle. A fixed fee is added to the amount of the
loan that must be paid to the bank regardless if the loan generates a return on
investment or not. The reasoning is that if the amount owed does not change
over time, it is profit and not interest and therefore acceptable under Sharia.

Islamic banks are also criticized by some for not applying the principle of
Mudarabah in an acceptable manner. Where Mudarabah stresses the sharing of
risk, critics point out that these banks are eager to take part in profit-sharing but
they have little tolerance for risk.

Ch 2.ISLAMIC BANKING FROM THEORY TO
PRACTICE.

Certain universities sponsored this concept on the theoretical level. The
first Islamic Economy Department was set up in the Umm Durman Islamic
University, in Sudan in 1967. This move was followed by efforts made by

22


leading Muslim intellectuals who embraced this particular concept, and their
academic works provide concrete evidence in this area. Specialized studies by
academics seeking to obtain M.A. and Ph. D. degrees dealt with the theoretical
and applied aspects of this emerging concept.

• ROLE OF MONEY IN ISLAMIC BANKING

Indeed, Islam views money as a means of serving the humanity rather
than being served by mankind. So wealth is held by the wealthy as a trust rather
than enjoying absolute ownership that could be disposed off in any manner.
Obviously, this gives a new dimension to the philosophy of funds and to the
nature and role of Islamic banks in the international community.

• INSTRUMENTS OF ISLAMIC INVESTMENT

Thanks to Islamic banks, the world markets became acquainted within a
few years only with new Islamic investment instruments and different forms of
financing were introduced. The most important of these are the following :-

1. Islamic Modaraba : This form of finance relies upon
combining knowledge, know-how and human efforts as well as available
funds to produce the expects fruits for human happiness.

2. Forms of Islamic Sales : The most important forms are :-

(a) Morabaha which allows a bank customer the opportunity to plan
for the future through a regulated financial programme providing
for honoring obligations when they become due without allowing

23


for any complacency or laxness to the practice created by the
conventional banking methods of overdraft financing;

(b) Al Sulam sale gives the opportunity to a farmer to look after his
crops with the use of finance provided by Islamic banks prior to
the harvest season so that the latter would recover their capital
finance after the harvest and a settlement becomes possible;

(c) Factoring sale (Bai Al Estisna') is a form which encourages
Islamic industries to boost their productivity. This particular from
of financing is combined with Morabaha sale provided by
Islamic banks to allow industries to operate more efficiently and
effectively as production financed by (Bai Al Estinsna') and
buyer of the factory production is financed by Morabaha.

In addition to the above forms, there are other instruments which are not
dealt with here. The most interesting of the applicable instrument is that of
options. In Islam, options are governed by fair and just rules and regulations
seeking to establish an international economic order. I do not have any doubt
that this approach will enable a more appropriate application of the optional
transactions in the near future.
As regards attracting cash liquidity their banking methods have greatly
developed especially in the Arabian Gulf region, and area which is characterized
by the availability of cash funds as well as the presence of several Islamic banks
and innovative Islamic banking instruments. Now a depositor has numerous
alternatives offering him the normal saving account which permits participation
in profit and loss, and there are the investment deposits the period of which
could extend from one month to a year. There are also the short and medium -
term investment certificates of deposits (Bonds).

24


Also there are what is called specific deposits which allow the depositor to
participate in more specialized portfolios involving a higher degree of risk in
consideration of participating in receiving higher returns on his investment.
Furthermore, Islamic companies with floating capital were introduce for the first
time in Bahrain giving individuals and Islamic financial institutions a greater
opportunity to investment will provide the basis for the future Islamic stock
market. If successful we will completely overcome the liquidity problem in
Islamic banks.

All these Islamic financial instruments, in addition to other existing
forms that we have not dealt with, are being used in practice not only in the
Islamic capital market but also in the world's major capital markets. With the
growth and advancement of telecommunications, today's world has become
smaller than it used to be. However, it remains for the efforts of Islamic banks'
officials to promote and market such financing forms and investment
instruments, so that they would reflect the attractive aspects and effectiveness of
such instrument. I do not have any doubt that these methods and instruments
will appeal to rational people who think with a balanced and scientific mind.

25


Ch.3 PROHIBITION OF USURY IN ISLAM.

Muslims of today have several ways of investing their money but
our duty as Muslims is to think carefully before choosing, in order to avoid
things forbidden under Islam, such as usury. In fact is the most important thing
to avoid as it is expressly prohibited under Islam as well as being unethical. By
its nature usury is a negative force and has bad moral effects and creates
economic disadvantages. Usury is an old
economic phenomenon which originated
from unscrupulous individuals and Islam
should seek to end this phenomena. Islam
arrived at a time when evil practices were
already firmly rooted in society and it is not
always easy to eradicate these practices. In
some cause Islam has to totally rebuild the
very fabric of society. The Quran has dealt
with this problem in a marvelous way because it takes into consideration the
human situation. Islam is not so much concerned about actions as it is about
intentions. Since Almighty God knows the nature of human beings and since we
need a radical change it is not merely a matter of obeying a dictate but rather a
true acceptance of these things in one's heart. When God set out these rules in
the Quran he took into consideration human limitations by gradually introducing
prohibitions. When Islam arrived, usury was already very prominent and so well
entrenched in society that it was impossible to eradicate immediately but had to
be phased out gradually in order to avoid serious damage to the fabric of

26


society. We see from the Quran that the prohibition of usury came in four
stages.
The first verse which relates to usury in the Quran was merely the
introduction to its prohibition and was dictated to Mohammad (peace be upon
Him) in Mecca. All the verses which were dictated in Mecca are characterized
by the consideration for human nature and seek to purify the human soul of the
sins remaining from the pre-Islamic era.

• In sura Rom (ch.no.. 30) we read :

"Whatever usury you take for increase through property of other people
will have no increase with God."

This verse is drawing people's attention, in a gentle manner, to the fact
that if people take interest from others now, that interest in their reward resulted
in increasing their wealth but they will not be entitled to any reward in the
afterlife. So we can see that the verse contains no threat of punishment of
warning but is simply a statement that one should not expect further reward.
Sometime later in the Quran another verse shows God's anger towards the
Israelis who were taking usury against his wishes and thereby deserving
punishment.

• From Sura Nissa (chp no...4) Verse 160 - 161 God says :

"For the iniquity of the Jews we made unlawful for them certain foods
good and whole-some which had been lawful for them; In that they hindered
many from God's way that they took usury, though they were forbidden, and
that they devoured men's substance wrongfully, we have prepared for those
among them who reject faith a grievous punishment."

27


There are certain orders from God and other prophets who believe in
God, which do not contradict in spite of great time lapses; therefore whatever is
prohibited is prohibited no matter how much time has elapsed.
Thus the Muslim people were made ready to accept the radical change
no the subject of usury and they were eager to know God's final decision on this
matter. Even the third verse showed people the disadvantages of usury and told
them how exploitative this system was.

• In sura Al-I-Umran :

"Ye who believer! Devour not usury doubled and multiplied; but fear
God that ye may really prosper"

What we should not in this verse is the clear reference to the worst
images of usury in the pre-Islamic period as the worst type of financial
agreement between two parties; thus it becomes clear to the Muslim how he
used to sin against his own brother. But the picture does not finish here when
one thinks of the effect is has on society as a whole. Therefore, the Quran in
these three previous verses states the case as an outstanding problem and the
Muslim knows, the Islamic way of solving this problem is radical and that its
rules cannot be constructed in any other way when it comes to the things which
are prohibited. The first thing which comes to mind when one thinks of usury
and its disadvantages is that it leads to economic and social pressure and leads
to paralysis of the efforts of those that lend because they just sit and wait for
their money and reap the profits which is undeniably unlawfully earned money.
Obviously the disadvantages of usury are vast and we can see from the
economic situation of today that usury is one of the main causes of inflation, if
not the main cause. It has direct negative impact on national economy. We see
that the rates of interest cause continuous increase in debit figure of all
borrowing countries. Therefore, if we have to put an end to inflation then we

28


have to deal with the problem of interest rates. This is one of the negative
aspects of usury and its effect on the economy but there are many other aspects
which we are going to discuss. Usury creates a paralyzed group who sits and
wait and therefore they refrain from the usual activities which might be of use to
society.

Usury also puts and end to informal borrowing and if usury becomes
common amongst people, human nature becomes avaricious and it becomes
very difficult for anyone to loan anything even to his own parents without
expecting something in return.

Now that it is clear to us all how bad usury is so we are prepared to
accept some orders from God which prohibit the dealings in usury.

We read in Sura Buqara(chp no.. 2) verse 275 "

"Those who devour usury will not stand except as stands one whome the
evil one by his touch hath driven to madness. That is because they say "trade is
like usury, but God hath permitted trade and forbidden usury". Those who after
receiving direction from their Load, desist, shall be pardoned for the past, their
case is for God to judge.

But those who repeat the offence are companions of that fire; they will
abide therein forever”. A marvelous description of the lender by usury and the
kind of society made by so many people like this is to be found in this verse of
the Quran.

The verse 278 from same Sura puts an end to such transactions in
order to purify the human soul.

29


"Ye who believe; Fear God and give up what remains of your demand
For usury, if ye are Indeed believers".

Therefore, we are not allowed to take interest on capital no matter how
long the period of lending is.
It is addressed to the believers and starts with the words 'those who
believe' and ends with the same words and anyone who deals with usury is then
a non-believer as this verse is addressed to only those who believe. Those who
ignore this are at war with God as clearly stated in verse 279 of Sura Buqara.

"If ye do it not,
Take notice of war
From God and His apostle;
But if ye turn back,
Ye shall have
Your capital sums;
Deal not unjustly,
And we shall not
Be dealt with unjustly".
The punishment for anyone disobeying this command is very serve.
Other wrong-doings are punished during this life, but for usury the punishment
comes during and after the life. The punishment is grave because the effects of
usury extend to the whole society and to the economy of the country and even to
the economy of the whole world so the punishment should be equal to the
Crime. The verse covers the whole subject of usury and leaves no place for
doubt, confusion or discussion. By this He gives final solution to eradicate such
dealings in society. This verse of the Quran was reaffirmed by one of the
sayings of the Prophet Mohammad (peace be upon Him) when he said that those
who are involved in usury including those who take, give, write or witness
transactions, would be demand.

30


Thus we see that in prohibiting this evil transaction society is saved from
economic, social and moral disaster. In Islam other evils such as deceit,
hoarding goods and exploitation are not given such prominence, as is the subject
of usury, as these are more obvious evils. But the subject of usury is given such
prominence as man can try to justify it and to make its presence in various ways.

Ch4. Islamic banking: A variation of conventional
banking?

The Encyclopaedia Britannica defines a bank as “… an institution that
deals in money and itssubstitutes and provides other financial services. Banks
accept deposits and make loans andderive a profit from the difference in the
interest rates paid.”.Islamic bank will fit thisdescription only just even if one
replaces ‘interest rates paid’ with ‘profit-shares and fees’.1Then what is the
difference between a conventional bank and this new form of banking
underwidespread public discussion today? A bank is an institution because,
similar to any others ocietally-sanctioned institutions such as an insurance
company, a bank is heavily regulatedby a set of laws (see
www.hifip.harvard.edu) passed by a society in which the bank operates.The
same is also true of the Islamic banks: see Mulijan, Dar and Hall (2004) on
capitaladequacy as an example of rules. In addition to the normal banking laws

31


and prudential laws,an Islamic bank is supervised by a Shari’ah Board to
enforce the application of fair-dealingand avoidance of a number of prohibited
financial transactions. Having thus given a simplebut yet satisfactory definition,
the motivation for this paper is to introduce the quintessence ofIslamic banking
in the broader context of conventional banking to lay bare the essentialprinciples
and practices involved.First and foremost banking is a modern human invention
within the financial sector of aneconomy - as opposed to the real sector of an
economy - with specific aims to fulfilthreesocially beneficial functions: (i)
efficient payment system that expedites payments to be madeto parties to
economic activities; (ii) intermediation function (see any standard banking
bookor for Islamic banking, see Chapra, 2002) that is to channel savings of
households in aneconomy to the producer units (businesses and government) for
reinvestment as capital, ascarce resource of mankind; and (c) other financial
transactions, which are a whole range ofspecialised activities such as mortgage
creation, cross-border trade guarantee (letter or credit), securities trading such as
in common stocks and others. The Islamic bank fulfils thesethree broad
functions as well as does a conventional bank: Islamic bank also
engagesinMonash Business Review Volume 3 Issue 1 – April 2007 2investment
financing, which a conventional bank generally avoids. An Islamic bank has
afourth function . 28 which is absent, to a large extent,
in conventional banking.The above discussion of what a bank is but brief. In the
last 100 years, banks have becomemore specialised thus complex: it is also the
case with the Islamic banks over the last 40years, which has led to newer
specialised entities of Islamic banking-finance-insurance.Broadly defined
financial transactions are performed by several specialised bank-likeinstitutions:
commercial banks; investment banks; savings institutions; credit unions;
bankholdingas well as financial-holding companies; development banks; and all
of them areregulated heavily.2 In the case of Islamic bank-like activities too,
newer form of financialactivities undertaken by banks are licensed separately;
Islamic Mutual funds; Islamic IndexFunds; Islamic Development Bank; Islamic

32


or Takaful Insurance; etc. In this article, not muchwill be discussed about these
specialised forms of banking-financial entities.

• Binding principles of financial transactions

Ethical principle 1 is that the profits earned by a bank from its activities
and returns made by abank to the depositors shall be (a) from sharing of risk in
the project and (b) profit-shareagreements and not pre-agreed fixed interest
payments, which is considered as prohibitedearnings because pre-agreed interest
agreement has no sharing of risk of investment ofmoney.3 Principle 2 is the
avoidance of financing any economic activity considered not in thelong-term
interest of society (examples are prostitution; gambling; production and sale
ofliquor for intoxication; etc).4 Principle 3 is avoidance of earnings from
extremely uncertainrisky financial activities bordering closely to a level of risk
of loss of money as in gambling:this principle arises from the mandate in
Koranic law that requires parties to contracts to avoidextreme risk.The first
principle is identified as avoidance of interest receipts and payments in financial
transactions as agreed among contemporary jurists’ interpretation since the
1960s.6 InearlierIslamic era, this principle was enunciated as avoidance of usury
or excessive interest (riba)and there is a continuing debate about this question
among the Muslim jurists as well as layscholars (a long line of commentators
from Aristotle to modern day Benjamin Franklin and achairman of Bank of
England) on how to deal with what is interest and what is excessiveinterest.
29
Although for practical purposes today, avoidance of any form of interest
received orpaid is considered as a must in Islamic banking, a position that has
led to the devising Islamic banking as a solution. In place `of a pre-agreed
interest payment/receipt, a pre-agreedprofit-share formula conditional on the
outcome of the end-result of financial lending activities– by sharing in
riskisconsidered as permissible in Islamic banking.The second principle is akin
to the enunciation of a pro-society social movement in recenthistory. In the

33


1970s in the U.S., there was a movement that started ethical investment
funds,and created what were then termed ethical mutual funds. That movement
also considerefinancing anti-societal activities (as well as investment by funds
in firms producing weapons ofmass destruction) as not-pro-society. An Islamic
bank will not engage in financingactivities
that are considered unequivocally as illegal (haram) for an adherent to Islam.
Hence, nofinancing activities considered anti-society are
permittedinfinancialtransactions.The thirdprinciple is that a contract of financial
service must have upfront all dangers pre-announced ordeclared: that is, as in
modern finance, there ought to be transparency in financial contractsthat reduces
asymmetric information advantage of parties to the contract. Hence, it
isconsidered that a contract that is likely to result in loss of capital, and the level
of risk (garar)borders that of gambling (gain always for the gas operator, and a
sure loss for almost allothers), an Islamic bank is not permitted to offer such a
financial product.Monash .

30
• Operations

First, by practice over many centuries, certain forms of financial
transactions have been vested as consistent with this form of banking. The over-
riding criteria are: is money begetting money without risk-sharing?; is the socio-

34


ethical value of a financial transaction prosociety?By answering these two
critical criteria, new products are being financially engineered in addition to the
ones that had existed in historical time. What a bank is as a business can be
conceived by referenced a balance sheet of a banklikebusiness: see Chart 1. On
the left side of the balance sheet (which describes the financial position of a
bank at the end of, say, a year) are the assets that earn income. These are the
loans marked A (that offer interest income to a conventional bank and profit-
share income ton Islamic bank). Fixed assets are marked B (some of which, for
example, the office space, issued to produce the financial products and services
while some assets may provide capital gains if owned by a bank while such a
building also saves the rent that needs to be paid).While a conventional bank
would call loan as shown in the Performa as an earning assets from making
loans, an Islamic bank would not call it a loan asset, and may prefer to call it
financing or profit-share agreements as loan has the connotation of interest
being attached tout. A and B together add up as the total assets of a bank bait a
conventional or an Islamic bank: how these items are classified are controlled
by the accounting standards: for Islamic banking standards, see Rifaat (2001).
The Sample Balance Sheet of a Banking Business

A : loan C : Deposits

B : fixed assets D : Capital
Total assets. = Liability’s + equity

Item C on the right-hand side is the deposit from the members of the
public either as time/savingsdeposits or checking deposits In the case of
checking deposits for safekeeping and convenience(wadiah), no return is
guaranteed: however, an Islamic bank may make ex gracia payments, which
ispermitted. 31

35


In that case, in a conventional bank, a time deposit will earn a small interest pre-
agreed withthe depositor while, in an Islamic bank, the depositor receives a
profit share declared at the end of each
month on the basis of profits made on the deposits by the bank if the loan is
profit-share basis(mudaraba) or joint venture return if on joint venture basis
(murabaha).
A point to remember here is that, by engaging in profit-sharing
funding/financing agreements, the fundprovided Islamic banks thereby takes on
the character of “investment” which a conventional bank doesnot do. Please
refer to Footnote No. 1 for elucidation. If the deposit is a checking account, then
anIslamic bank ensures its safekeeping and return, but does not guarantee a
return although the bank isfree to make a donation; most conventional banks
used to pay nothing, but since the 1980s
Item C on the right-hand side is the deposit from the members of the public
either as time/savings
deposits or checking deposits In the case of checking deposits for safekeeping
and convenience(wadiah), no return is guaranteed: however, an Islamic bank
may make ex gracia payments, which ispermitted. In that case, in a conventional
bank, a time deposit will earn a small interest pre-agreed withthe depositor
while, in an Islamic bank, the depositor receives a profit share declared at the
end of eachmonth on the basis of profits made on the deposits by the bank if the
loan is profit-share basis
(mudaraba) or joint venture return if on joint venture basis (murabaha).A point
to remember here is that, by engaging in profit-sharing funding/financing
agreements, the fundprovided Islamic banks thereby takes on the character of
“investment” which a conventional bank doesnot do. Please refer to Footnote
No. 1 for elucidation. If the deposit is a checking account, then anIslamic bank
ensures its safekeeping and return, but does not guarantee a return although the
bank isfree to make a donation; most conventional banks used to pay nothing,
but since the 1980s.

36


Table 1: A Simple Classification of Islamic Banking
Using Financial Statements
Financial Statement items CONVENTIONAL BANK ISLAMIC
BANK
Panel A: Performance of a bank
Profit & Loss
Net interest income
Financial services income
Capital gains
Less
-Operating expenses
-Amortisation of goodwill
-Charge for doubtful loans
= Gross Profits
- Income taxes
= Net Profits
Net income (profit shares)
Financial services incomes
Capital gains
Less
-Operating expenses
-Amortisation of goodwill
-Charge for doubtful loans
= Gross Profitsa
- Income taxes

37


= Net ProfitsaPanel B: Financial Position of a Bank
Balance Sheet
Assets:
≡ Liabilities and
Shareholder capital
Loans and Advances
(after provisions for NPL)
Fixed assets
Total Assets
Total Risk-weighted Assetsc
Deposits & other borrowing
Bonds, notes & subor debt
Floating Rate Notes
Ordinary Shares
Equity instruments
Total Equity
Loans & Advancesb
(after provisions for NPL)
Fixed assets
Total Assets
Total Risk-weighted Assetsc
Deposits & other borrowing
Bonds, notes & subor debtb
Floating Rate Notesb
Ordinary Shares (musharaka)
Equity instruments
Total Equity (musharaka)

A Income earned by an Islamic bank is from profit-shares, services fee
and the excessover all expenses.b Can be any or all of: profit shares

38


(mudarabah); cost plus services (murabaha); joint-venture
(musaraka);safekeeping and leasing of assets (ijarah).c This refers to the
requirement of both conventional and Islamic banks to risk-weight the assets as
per Basel I or IIaccord. These accords (wadiah); at the Bank for International
Settlements (BIS) in Basel Switzerland requires that the value of
assets are adjusted downwards by a system of risk evaluation of the assets so
that the adjusted figures could thenbe compared as assets adjusted to account for
risk.
Please note that the spelling of the concepts used in this paper vary as in the
literature. I have chosen the mostsimple spelling to keep this readable, thus
incurring the mistake of incorrect pronunciation.The Table includes two
financial statements: Panel A refers to the performance of a bankover a
reporting period (Profit and Loss); and Panel B is a financial position.
The of areporting period in a balance sheet.A conventional bank reports net
income on loans net of interest paid to the depositors andloan capital providers.
An Islamic bank does not accept or pay interest but reports net incomefrom
profit-shares agreements (see footnotes “a” and “b” to the Table for the Islamic
bankterms used) and fee incomes from sale-like or lease-like or banking
services fees. Profit shareincome may be from different forms of lending (more
correctly financing) activities such asprofit shares (mudarabah) or joint-venture
(musaraka) or some specialised form of financingnot described here. Or it may
be from services fees for safekeeping (wadiah), cost plusservices (murabaha,
and leasing of assets (ijarah). One final item (not shown in the pro-formaabove)
is a portion compulsorily deducted from profits for charitable purposes. In
practice itamounts to a tiny fraction of the pre-tax profits.Continuing the other
items in the Panel A, all items are similar, but for the exception we havenoted
that the entire report is conditional on income reporting that (i) avoids interest,
(ii)financing activities that are not in the long-term interest of society (no funds
for liquorproduction for consumption, no gambling, etc.) and (iii) prohibitions
of financial products withextreme information asymmetry bordering near

39


gambling, hence dangerously risky as aninvestment. Looking at the balance
sheet in Panel B, the Islamic bank would have the sametype of entries (the
actual items will have some technical terms equivalent to them).
Depositsand other borrowings would mean that these borrowings are consistent
with the threeprinciples discussed earlier: for example a bank may hold a bond,
and but it is called a sukukbond as it is issued with no pre-agreed interest
coupons as is the case in conventional bondsthat offers a pre-agreed interest
payment. There are finer points to consider here. The issuerof sukuk (say a
central bank) has some real assets, which provides periodic rental
incomes,which income is then used to provide returns to the investor in a sukuk
bond. Similarly, theequity may be referred to as the musaraka fund but it means
exactly the same as equity.The identical nature9 of the column entries to explain
the terms in Table 1 for the conventionaland the Islamic banks may convince
once again that the latter is a newer form of banking. As such it is yet another
specialised bank offering newer products in the same way as investmentbanking
started to offer opportunities for securitisation of assets some decades ago.
Newerforms of banking fulfil the demand by clients who would not otherwise
participate in thebanking activities of a typical conventional bank
Islamic banks provide for their clients secularsatisfaction that their financial
activities is carried out in a manner that is socio-ethicallyconsistent with their
beliefs of avoidance of interest (riba), pro-societal financing(non-haram)and
avoidance of extreme risk (garar). The nature of profits therefore takes a
different formfrom than the pre-agreed, pre-fixed, non-risk-shared rewards that
has been promoted by thefinancial institutions for four centuries.
Over the historical time, banks have tended to seek profits by
distancing their monitoringfunction by going from fixed to variable interest, and
switching from engaging in monitoringaggressively to securitising their risky
products and taking such products off the balancesheet. This results in firms
with bank loans relaxing their management oversight or in somefamous cases
engaging in outright fraud unknown to the bank that lends! These

40


moderninnovations have tended on the other hand to reduce the burden imposed
by modern andcomplex societies on banks to perform the function of delegated
monitors. It must also besaid that the same forces have diminished the social
responsibility of modern banks, andhelped them to be more focused on profits
without due consideration of the end-use to which
the humanity’s accumulated scarce capital is being deployed. From the outset
historically,banks have not been conditioned to promote broader social goals.10
Is ethical banking thewedge that would make banking more socially
responsible?

Term Structure of Investment by 20 Islamic Banks, 1988

Type of Investment Amount* % of Total
Short-term 4,909.8 68.4
Social lending 64.2 0.9

Real-estate investment 1,498.2 20.9
Medium- and long-term investment 707.7 9.

• Contemporary scene

In this context, Islamic banking with its orthodoxy may appear to be a
revisionist banking. Yes, it is and if the customer requires that, the banks are
willing to provide that service wholeheartedly. Islamic banking is growing at a
rate of about 15% per annum, about four times faster than conventional banking:
see Islamic Development Bank website and Internet sources. From just a
handful of institutions mostly in the Arab countries in the 1960s, it has
innovated itself to be accepted by the bastions of banking in England and
Switzerland. Both these countries appear to be doing the big-ticket Islamic
banking and their major banks have begun to join in the chase for a slice of the

41


business: Citigroup; HSBC; UBS; DresdnerBank;ABN-Amro are the big ticket
banks doing large-ticket banking and, importantly, having the expertise to
financially engineer new products that are exciting for the customers with
deeper pockets but demanding Islamic financial products. There are about 400-
over banks licensed as Islamic banks or many have operating divisions with a
Shari’ah Board in about 44countries or more. The total assets of these banks are
estimated at around US$ 7 trillion witan equity capital base of some US$ 400
billion.11.A number of institutions have been organised to supervise these
banks. Apart from theircompliance with the laws (licensing-operation laws;
prudential supervision laws; international supervision rules), these supra-
national bodies provide a degree of standardization in accounting treatments of
numbers (Accounting and Auditing Standards Organization for Islamic
Financial Institutions, AASOIFI); in financial service provision (Islamic
Financial Services Board, which also works with the BIS on Basel II, and on
capital adequacy). The Islamic Development Bank (IDB) is another
organization that promotes this new form of banking. An international body
named General Council for Islamic Banks and Financial Institutions (GCIBFI)
is a self-regulating information gathering body that promotes some degree of
homogenization of this new form of banking-finance-insurance. On the training
of human resources, not much has been done till recently as the provision
Islamic finance expertise has been left to the private sector with very few
countries or institutions (exception are Indonesia, Malaysia and Islamic
Development Bank) allocating resources for.
the very specific purpose of training in this new form of banking. The scholar
strained in religious studies has adequate training contracts based upon the
interpretations of legal schools in Islam. There are plenty of resources in this
regard since Arabic studies and religious studies have been adequately catered
for in major universities. However, training in banking, finance and insurance
remains inadequate. In 2006, a body has been formed (INCEIF for International
Centre for Education)

42


• Risk Management Issues in Islamic Banking

In the following pages, we’ll look at examples of
some different risks faced by Islamic banks
• Impacts of shari’a compliance on credit, market, and
operational risk
• Not exhaustive list of all unique Islamic risks
• Based mainly on observations in Saudi Arabia and
GCC

• Islamic law – shari’a – has several clear
Proscriptions on financial activity
• The requirement to pay zakat
• Prohibitions on financing prohibited activity, such
as alcohol or prostitution
• Prohibition of:
– Qimar (gambling)
– Myisur (deceptive gaming)
– Gharar, or speculative outcomes
– Riba, usually translated as interest

• Riba implies unfairly getting a return on funds
• without sharing in the risk

• Riba comes from the root for ‘increase’ or ‘grow’ –
meaning increase in money value in and of itself
• Early Muslim scholars considered money a symbol of
value but not a store of value in itself

43


• An increase in money without an underlying increase
in the value of the symbolic good was unfair

• To most observers, riba sounds like interest on debt

• A few scholars believe that riba means usury, i.e.
inequitable interest rates
• The great majority of scholars define riba more closely
to interest – rent on money
• Concept of risk sharing – i.e. if enterprise loses money,
unfair to expect the same back
• Seems to rule out classic deposit-taking and lending
institution
• At first glance, seems classic division between debt and
equity, but in fact more complicated.

• Commercial and investment banks are separated by
• the difference between debt and equity

Commercial and investment banks are separated by
the difference between debt and equity
• I give you a loan of 100
• I expect 100 back, no matter
what
• I am willing to accept a
lower (but sure) return in
exchange for my
expectation

44


• I give you equity of 100
• I share in your ownership
• I expect to participate in the ups
and downs of your enterprise
• But I have a much greater
(unsure) upside potential to
compensate me for my risktaking
Commercial Banking Intermediary Investment Banking Intermediary

• Most governments distinguish between deposittaking
• banks and investment companies

• Until recently, the Glass-Steagall Act segregated US
commercial banks from investment banks
• In most countries, including Saudi Arabia, separate
agencies regulate each – conventional or Islamic.

• We all know there is not a hard line between debt
• risk and equity risk

• The two are increasingly blended and interdependent
• Low risk equity may be safer than high risk debt
• But contractually they differ – and deposits above all
are seen as different.

45


• Governments are universally keen to protect
• depositors

• When deposit-taking banks fail, especially systemically,
governments typically protect depositors
• The Basel accords (I and II) evolved to agree on a global
approach to assigning bank capital to risk.

• In the following pages, we’ll look at a few bank
• credit products, as well as some broader risk issues

• Islamic banking
Products.

• The classic murabaha is closest to the risk profile of
• a standard bank credit.
Client specifies goods to be purchased, e.g. raw material or
capital goods. Contracts with Bank to acquire on client account.
• Bank buys goods and acquires title of ownership from seller.
• Client takes delivery. Client contracts to pay on deferred basi.
• May be over 90% of assets in some banks
• Very high in consumer lending, with most credits
guaranteed by garnished salaries
• Believed to be over 80% of total system Islamic credits
• Remainder mainly ijara (e.g. cars) in consumer and
musharaka in corporate
• Not often widely touted, since many feel this is not the
most ideal Islamic investment.

46


• Most important, the bank must own the asset, even
• if momentarily

• If ownership does not pass through the bank,
becomes a cash loan – and so haram
• The degree of proof of ownership differs by Shari’s
Board, and so with it the risk.

• Payments may not include interest, however finance
• charges may be included in the installments

• Not charged separately (as is interest) but as part of
Total fees.
• May reflect prevailing interest rates, as a market
Reference.

• If a murabaha defaults, the Bank cannot
• compensate itself by running penalty charges

• Otherwise it would be riba
• Shari’a Boards feel differently about levying a onetime late fee.

47


• In Saudi Arabia and the GCC, a large share of
• transactions are commodity murabaha

• Back-to-back commodity trade which effectively permits
a cash deposit or a cash credit
• For foreign currency, typically on London Commodity
Exchange (copper, palladium, etc.)
• For domestic currency, may be with local broker (e.g.
rice, coffee)
• Interbank placements are usually commodity murabaha
• Most consumer credits and many corporate credits are
structured in this way.

• The direct credit risk of a tawarruq is similar to a
• conventional cash credit, but with some added risks

• The extra group of contracts adds operational risk,
which may lead to other risks
– Market risk (e.g. settlement risk)
– Credit risk (e.g. counterparty risk)
• Again, the degree and timing of ownership required
changes the risk
• Similar to simple murabaha, penalty charges may not
be added.

48


• Ijara are leases and their risks are comparable to
• conventional leases

• Bank owns asset, with all that implies
• Often must be in separate leasing company
• If leased to purchase, economically very similar to a
conventional credit
• Financial charges may be built into rental fees
• Mainly used for cars, but some attempt to set up
ijara to buy homes
• May be set up to be variable rate – re-priced against
a reference rate
• Less popular among corporates, due to zakat
Disadvantages.
• Treasury risks

Treasury and, more broadly, market risk
management is complicated by shari’a compliance

• Most derivative contracts typically not permitted
– Swaps (e.g. foreign exchange)
– Options
• Some synthetic products have been created and are
being tested in more liberal regimes
• Strong need for shari’a compliant instruments to
manage liquidity:

49


– Short-term placements and borrowings
– Government and investment grade sukuk

Ch .5 RESPONSIBILITIES OF ISLAMIC BANKS

In fact, Islamic banks have a major responsibility to shoulder for the fate
of the community and for rescuing it from the threats posed by economic
problems confronting it. In view of this responsibility, emphasis must be laid in
the forthcoming stage on a number of points, the most important of which are as
follows:-

1. Enforcing the teachings of Islam in all transactions concluded provided
that all the staff of such banks and customers dealing with them must be
reformed Islamically and act within the framework of an Islamic
formula, so that any person approaching and Islamic bank should be
given the impression that he is entering a sacred place to perform a
religious ritual, that is the use and employment of capital for what is
acceptable and satisfactory to God, the Almighty, for the purposes
allowed in this worldly life.

2. Stressing that spiritual and religious values and good conduct and
behavior are the essential prerequisites for the happiness of the
community, and that any amassing of funds and any capital growth at the
expense of our Islamic ideals are contrary expense of our Islamic ideals
are contrary to divine laws and in the process are destructive to the
human community.

50


3. Advising Muslims to develop savings and savings habit regardless of
how small such savings are, since through the promotion of saving
awareness Muslims will be able to plan their development projects.

4. Seeking to improve the economic and social standards of Muslim
peoples and realization of solidarity and social cohesion among them.

5. Striving to set up Islamic financial institutions and promoting them
throughout the world in order to achieve their missionary role and in
order to complement the services needed by Islamic financial
institutions.

6. Establishment of Islamic financial markets such as Islamic stock
market and commercial centers and introducing such other financial
instruments required for the recycling of capital.

7. Seeking to establish an Islamic common market which is believed to
be one of the most important means leading to the cohesion of Islamic
peoples, eliminating barriers between them and eventually benefiting
from their capabilities.

51


Ch6. GROWTH OF ISLAMIC BANKING

52


In 1975 the first Islamic commercial bank opened for business in Dubai,
United Arab Emirates under the name of Dubai Islamic Bank and within twelve
years the number of Islamic banks grew to almost sixty. And interested observer
will note that the balance sheets of these banks showed a rapid and steady
growth when we compare the figures for the two Hijri year 1405 and 1406. In
spite of the prevailing economic recession in the world, Islamic banks recorded
a remarkable growth in the items of their balance sheets.

Information obtained from the International Association of Islamic Banks
(IAIB) indicates that the consolidated total balance sheets of Islamic banks rose
from US$ 7,548.3 million at the end of 1405 to US$ 8,787.4 million at the end
of 1406, and increase of US$ 1,239.1 million or 16.4%Total customer deposits
at the end of 1406, were US$ 6,683.8 million, compared with US$ 5,752.3
million at the end of 1405, showing an increase of US$ 931.5 million or
16.2%Shareholders' equity recorded and increase of US$ 90.7 million. It rose
from US$ 784.6 million at the end of 1405 to reach US$ 87.3 million at the end
of 1406, showing an increase of 11.6%.

• SPREAD OF ISLAMIC BANKING

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This advanced and remarkable trend is accompanied by another
noteworthy development, which is reflected in the diversity of the geographical
areas where Islamic3 banks are based. Within a few years they managed to
make their presence felt in three of the world's major continents, namely Asia,
Africa and Europe.

This geographical diversification serves as proof of the viability of the
Islamic economic system for every geographical region. In addition, it will serve
to enhance economic co-operation based upon Islamic law (Shariaa) amongst
the peoples of these continents. This will undoubtedly give Islamic economy a
further boost and significant dimensions in actual practice and application.

• SURVIVAL OF ISLAMIC BANKING

Islamic banks have succeeded within a brief span of time in influencing
existing methods of business dealings in the world capital market and to create
new investment channels that are acceptable to and recognized by Muslims and
non-Muslims. This phenomenon has been of special interest to international
banks which respond to this Islamic revival by introducing specialist
departments for studying this emerging trend and for creating channels for co-
operating with Islamic banks. Furthermore, they have gone as far as to alter their
accounting policies in order to cancel their interest calculations from their
accounting systems. Instruction were given to their accounting departments to
do without the element of usury in term of "giving and taking".

Parties doing business with Islamic banks have shown mounting interest
in their proposed financial transactions, which reflect the tolerance of Islam and
its response to the needs of the community. Moreover, such transactions are
believed to be the most regulated manner for the management of funds by well
considered and planned practices.
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While conventional banking institutions basically rely on the
creditworthiness of the borrower and the size of the available securities provided
by borrowers, Islamic banks pursue another policy that does not ignore the
borrower's credit-worthiness and his financial reputation but at the same time
they do not overestimate these factors.

They pay more attention of the feasibility of the proposed project, how
beneficial it is to the community and the management and scientific
qualifications enjoyed by the persons proposing a particular project.Even where
the borrower lacks the necessary financial capabilities and securities but has the
necessary management and scientific qualifications guaranteeing the success of
a well planned project, an Islamic bank will participate as a financial institution
providing the necessary funds that will be combined with the efforts and
available know-how of the parties proposing the project. In this Islamic
modaraba (participation financing), so that the Muslim community or even the
global community will not be deprived of a project that is beneficial to the
whole world.

55


Ch.7 Islamic banking is not for Muslims alone
Filed under: Islamic Banking News, Qatar

The Qatar International Islamic Bank (QIIB) is keen to tap the vast
expatriate population in the country, non-Muslims in particular. QIIB strategists
hope to reach out to the expatriate communities by spreading general awareness
about Islamic banking. Islamic banking is not for Muslims alone. This is the
first and foremost thing that needs to be made clear, says Abdul Basit Al Sheibi,
general manager of QIIB. The basic difference between conventional and
Islamic banking is that the latter’s focus is on making a society savings-oriented
rather than encouraging people to spend. “In that sense, you can say that Islamic
banks basically follow the concept of investment banking as they do not preach
and encourage spending,” stresses Abdul Basit. And, that is precisely the reason
why Islamic banks do not lend. That they do not deal in interest-based banking,
is common knowledge. QIIB, says the general manager, is the only bank in the
country that shares profits with customers four times in a year, on a quarterly
basis. Other banks disburse returns twice a year. Return by way of profits is 4.25
per cent annual on term deposits of a year. The percentage is four for six-month
deposits and 3.5 and 3.25 per cent, respectively, for three and one month
deposits.

56


Savings bank deposits carry a return (profits) of three per cent a year.
Anyone can open term and savings deposit accounts with QIIB, says the GM.
As conventional banks have been permitted to set up Islamic banking windows
and some have been allowed to open full-fledged Islamic banking branches in
the country, the competition has become fierce.

“It is a good sign, though, for the opening of so many Islamic banking windows
and branches point to the fact that there is growing demand for its products and
services,” says Abdul Basit. Additionally, the competition has prompted us to
learn and enhance our own products and services, he adds. Qatar was the only
country in 1991 to have two Islamic banks, he said. Islamic banking is growing
at a rate of 15 per cent worldwide annually. The figure is much lower for
traditional banks. There are an estimated 235 Islamic banks in some 40
countries, including outside the Muslim world. Their total assets were worth
$250bn until recently. However, with the opening of Islamic banking windows
and full fledged branches by some conventional banks around the world, the
assets have risen to $350bn presently, said Abdul Basit. Bahrain continues to be
the country with the maximum number of Islamic banks.

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Ch.8 India is the Best Contender for Islamic Banking
-- Dr. Hussein Hamid Hassan, Chairman Dubai Islamic Bank

Looking at its past, the present economic growth, and the future with
Manmohan Singh, the world renowned economist as its Prime Minister, India
becomes the best contender for the Islamic Banking and Finance, opined Dr.
Hussein Hamid Hassan, father of Islamic Banking and financial products,
opined in Mumbai on December 3. Speaking at a Consultation Meeting with
professional bankers, conventional as well as Islamic, organised by the Islamic
Banking Committee Jamaat-e-Islami Hind, Dr. Hassan explained that Islamic
Banking is the most equitable form of financing since it enables the creation of
wealth without fuelling inflation or stoking financial crisis. He also believed that
introduction of Islamic Banking in India would attract billions of dollars into
India. Detailing about the Islamic banking and financial products like
Murabahah and Mudarabah which can convert a failed conventional bank into a

58


booming Islamic Bank, he shared his experiences of working with the Banks of
Japan, Deutsche Bank. He said, “Islamic Banking is not for the Muslims only’ it
is a better alternative to the conventional banking and it is for investment,
development and financing.” Differentiating Islamic banking from a
conventional one, he explained, “On the asset side conventional banks have only
one product – that’s loan with interest. Islamic Banking has unlimited product to
suit every customer, every project, under any circumstances.”
"font-size: Professional bankers shared mix reaction. Pitambar Choudhry, Vice
President and Head International Business Division, TATA Asset Management
Limited and Arun Chatterjee, Vice President, Planning& budgeting: nIndus Ind
bank also attended and were keen to know about the Islamic Banking Products
and their demands in India and world over. H.Abdur Raqeeb, Convenor Islamic
Banking Committee, Jamaat-e-islami Hind said, " Most of the 150 million
Muslims in India do not deposit their savings in the saving bank account and
Fixed deposit because of the interest and Islamic Banking will boost up the
Domestic Saving rate in India. It will also attract funds from the other
communities and Petro Dollars as well." Renowned Islamic Bankers also share
their experiences and the problems they faced while practicing Islamic Banking
in India. Rashid Umer, Managing Director of Al Barka informed that since
Islamic Banking is not permissible in India so his company is registered as the
Non Banking Financial Company NBFC and described, "Given the current
government policies and banking Act it is not possible to run the Islamic Banks
in India." He and Imran Furniture wala, Chairman Memon co-Operative bank
urged, "Policies has to be change and laws has to be amended for it." lang
M.H Khatkhate, founder, Baitun Nassar Co-Operative society, Mumbai , Abdul
Hasib, Noorul Haq Siddiqui, Bazil Shaikh , former executives of Reserve Bank
of India, nK.M.Arif, actively contributed in the discussion specially the legal
and practical difficulties regarding the Islamic Banking in India. ", Professional
bankers shared mixed reaction. Pitambar Choudhry, Vice President and Head
International Business Division, TATA Asset Management Limited, and Arun

59


Chatterjee, Vice President, Planning and Budgeting, Indus Ind Bank were keen
to know more about the Islamic Banking Products and their demands in India
and world over.
H. Abdur Raqeeb, Convenor Islamic Banking Committee, Jamaat-e-
Islami Hind, said, “Most of the 150 million Muslims in India do not deposit
their savings in the Saving Bank account and Fixed Deposit because of the
interest and thus with their funds Islamic Banking will boost up domestic saving
rate in India. It will also attract funds from other communities and Petro Dollars
as well.” Renowned Islamic Bankers also shared their experiences and the
problems they faced while practising Islamic Banking in India. Rashid Umer,
Managing Director of Al Barka informed that since Islamic Banking is not
permissible in India, his company is registered as a Non-Banking Financial
Company (NBFC). He described, “Given the current government policies and
Banking Act it is not possible to run Islamic Banks in India.” He and Imran
Furniturewala, Chairman Memon Co-operative Bank urged, “Policies have to be
changed and laws have to be amended for it.” M.H. Khatkhate, founder Baitun
Nassar Co-Operative Society, Mumbai, Abdul Hasib, Noorul Haq Siddiqui,
Bazil Shaikh, former executives of Reserve Bank of India, K.M. Arif, actively
contributed to the discussion especially the legal and practical difficulties
regarding the Islamic Banking in India. Besides publishing Books on Islamic
Banking and Economics, Jamaat-e-Islami, Hind, has pursued the case of
Establishing Islamic Banking in India in the late 70's during the Janata Party
Government in the Centre when the Late Janab Zulfiqarullah was the Deputy
Finance Minister also established chain of Interest Free Credit Societies which
are more than 500 throughout the length and breadth of our country providing
micro credit to the poor and the needy. nH.Abdur Raqeeb, informed,
"Encouraged with the promotion and Successful operation of Islamic Bank
world over we have revived this struggle and kept International and national
Seminars, submitted the papers on the need and importance of Islamic banking
in India to the RBI, met with the Finance Minister informed the leading media

60


about the issue. Mr. Qadar Supariwala, noted Exporter and Businessman,
showed his interest in Islamic Banking and accepted, “There is a lot of Barkah
while doing interest free banking.”

Mr. K.K. Ali , CEO, Alternative Investment and Credit Limited
(AICL), explained about the success of his NBFC in Kerala. He added, “AICL
has a turnover of nearly 10 crore. We are facing problems from RBI with regard
to receiving deposits since it requires declaration of interest in advance.”
Mr. Ghulam Akber, Secretary (Finance), Jamaat-e-Islami, Hind, presented a
Momento to Dr. Hussein Hamid Hassan and Dr. Rahmatullah, AICMEUS
thanked everybody present there for their enlightening opinions and
suggestions.
Besides publishing books on Islamic Banking and Economics, Jamaat-e-Islami
Hind pursued the case of establishing Islamic Banking in India in the late 1970s
during the Janata Party Government at the Centre.
when the Late Zulfiqarullah was the Deputy Finance Minister. It also
established a chain of Interest-Free Credit Societies which are more than 500
throughout the length and breadth of the country providing micro credit to the
poor and the needy. H. Abdur Raqeeb informed, “Encouraged with the
promotion and successful operation of Islamic Bank world over.

61


Ch.9 Islamic Banking Gains Momentum

Governments trying to set the frameworks for establishing Islamic
Banking. Conventional banks trying to extend their line of service by Islamic
Banking. And Islamic banks are expanding their network globally. Islamic
Banking is on the rise. But despite that impressive growth standards have to be
set in order to not dilute the quality of Islamic Banking.Dubai, United Arab
Emirates, June 26, 2009 .Recently there is a lot of talk about Islamic Banking as
it seems to have proofed more resilient than conventional banking. However the
total number of Islamic banks is still small and according to online-researches
conducted by Shariah-Fortune estimated at around 350-400 institutions
worldwide. Compared to around 9,500 banks located in the USA the Islamic
Banking sector still seems pretty small. But its relative small numbers bear
potential for extraordinary growth rates. According to estimates Islamic

62


Banking is one of the world's fasted growing financial sectors, rising 15-20 %
p.a. Asian Banker Research Group found out that growth rate is as high as 26.7
% among the 100 largest Islamic banks. Basically Islamic Banking is not only
restricted to about 1.5 bn Muslims; indeed even non-Muslims can profit from
the advantages of Shariah-compliant banking. Most of the banks offer their
services to non-Muslims as well. Islamic banks are located in 50 countries
worldwide and can be found in countries like Algeria, Azerbaijan,...Yemen.
Major Islamic Banking hubs are Malaysia, Bahrain, UK and UAE. With
regards to the above mentioned many countries and banks now trying to
establish or expand Shariah-compliant banking.

A recent example is the mainly Muslim nation of Kazakhstan in which 3-
4 Islamic banks are planning to set up operations soon. Special attention should
be paid to China. The China Banking Regulatory Commission had given
approval to a pilot project of Bank of Ningxia to undertake Islamic financial
services in the People's Republic of China. Even African countries like Nigeria
or Senegal trying now to expand their Islamic Finance systems. In March 2009,
a framework for non-interest banking was released by the Central Bank of
Nigeria. 56More examples could be named.However
many of these countries are not yet
Ready to offer Shariah-compliant banking services as they either lack human
resources, expertise or the economical and political framework to do so.
According to Dr. Al Jarhi, President of the International Association for Islamic
Economics, '...one of the most serious challenges is represented in the need for
set standards and criteria for the governance of Shariah boards at IslaReceive.

63


64

• Dubai Plans World’s Largest Islamic Bank
Reuters

DUBAI, 10 January 2008 — Dubai plans to create the world’s largest Islamic bank
within five years, spending as much as $1 billion on individual acquisitions in
countries as far apart as Indonesia, Egypt and Britain, Noor Islamic Bank said.Noor,
which is 25 percent owned by the government of Dubai and 25 percent by the
emirate’s ruler, plans to spend between $500 million and $1 billion each time on a
“few” acquisitions in Europe, Asia and North Africa, Chief Executive Officer Hussain
Al-Qemzi told Reuters in an interview on Tuesday.“We aim to be the largest Islamic
bank within five years,” Qemzi said in his office in Dubai, two days after the lender
officially started operations. “Acquisitions will be the main way because there is no
time to grow organically,” he saiThe Dubai government, ruler Sheikh Mohammed bin
Rashid Al-Maktoum and 15 other individuals have put 3.16 billion dirhams ($860.6
million) into the project and may put in more when the lender starts considering
acquisitions by the end of March, with a view to making its first move outside its
United Arab Emirates base before year-end, Qemzi said.Islamic lenders controlled
assets worth about $750 billion at the end of 2006, a figure which may rise above $1
trillion by 2010 as the industry expands, according to US management consultants
McKinsey & Co.

Saudi Arabia’s Al-Rajhi Bank, the world’s largest Islamic lender, had assets worth
$33 billion at the end of September.In its acquisition strategy, “it would be better to
do a few of a good size rather than many small ones,” Qemzi said, with Egypt, and
North African nations such as Morocco and Algeria at the top of the wish-list.Noor
aims to be the world’s biggest Islamic bank by assets and countries of operation, with
a focus on the largest Muslim nations such as Turkey, Egypt, Pakistan and Indonesia,
Qemzi said.“We also want to be in mature markets, such as in Europe, were Muslim
populations are growing,” Qemzi said, pointing to Britain, France and
Germany.Unlike in conventional banking, where lenders such as Citigroup Inc and
HSBC Holdings Plc dominate, there are no global Islamic banks.Noor, which plans to

65


• Islamic Bank of Britain Voted Best New Islamic Bank in
GlobalPoll

Islamic Bank of Britain, the only totally Islamic bank to operate in
the UK, has been voted ‘Best New Islamic Bank’ in a worldwide poll of
non-banking, finance industry professionals.

The survey, which is the first to canvas the views of professionals working in
this fast growing global Islamic finance market, was carried out by Islamic
Finance News, a leading industry sector on-line newsletter. Votes were
received from a wide range of professionals, including Islamic corporate issuers,
Government bodies and financial intermediaries. To ensure the results were
completely impartial, professionals working directly for Islamic banks were
banned from taking part in the poll.

Islamic Bank of Britain came top of its category, edging out competition
from thirty four other banks, including Emirates Islamic Bank, Arab Islamic
Bank and Abu Dhabi Islamic Bank.

Michael Hanlon, managing director of Islamic Bank of Britain, says:
“Although we are the only totally Islamic bank to operate in Britain, there are
around 200 Islamic financial institutions throughout the world, making
competition intense. We are delighted that this poll shows Islamic Bank of
Britain to be regarded so highly by its industry peers”.

66


Ashraf Piranie, Executive Director of the bank added: “This is a testament to
our professional approach and commitment and I believe that it is these qualities
which mean our customers are forming the same high opinion of us.”

Islamic Bank of Britain launched at the end of 2004, marking the first time
that Britain’s 1.8 million Muslims had access to banking facilities from a British
bank wholly operated in accordance with Islamic Sharia’a principles. Since its
launch the Bank has pioneered Islamic retail banking in the UK, opened
branches in London, Birmingham, Leicester and Manchester and launched a
wide range of products, some of which, including unsecured personal finance
and deposit accounts, remain unique in the UK. Internet banking and home
finance are due to be launched in 2006.

Press release archive:

• Islamic Bank of Britain opens first North West branch
• Islamic Bank of Britain to open in Manchester
• Islamic Bank of Britain opens Alum Rock Road branch
• Islamic Bank of Britain offers unique service for Masjids and
Madrasahs
• ISLAMIC BANK OF BRITAIN PLC - Final Results Announcement -
Five month period ended 31 December 2004
• ISLAMIC BANK OF BRITAIN PLC - Interim Results for the six
months to 30 June 2005
• East Midlands Imams Gather in Leicester for Major Islamic Finance
Conference
• ONE YEAR SINCE THE FIRST TOTALLY ISLAMIC BANK
OPENED IN THE UK - How Islamic Bank of Britain has Pioneered Islamic
Finance
• Islamic Bank of Britain Launches 'Halal' Banking for UK Businesses

67


• Islamic Islamic Bank of Britain opens Whitechapel branch
• Islamic Bank of Britain Appoints Finance Director
• Islamic Bank of Britain opens Southall branch
• 'Halal' Personal Finance is another first from Islamic Bank of Britain
• UK’s only dedicated Islamic bank offers service to non-UK residents
• Islamic Bank of Britain offers helping hand to the financially excluded
• Lobbying by Islamic Bank of Britain Results in Changes to Taxation
Legislation .
• Islamic Bank of Britain Launches Direct Banking Service, including
New Current Account
• Islamic Bank of Britain opens first Leicester branch
• Islamic Bank of Britain opens first Birmingham branch
• Islamic Bank of Britain to open first branch in the UK
• Islamic Bank of Britain PLC Announces Plans to List on Alternative
Investment Market

68


• 16th Annual The World Islamic Banking Conference, 6, 7
& 8, December, 2009, Gulf Hotel, Kingdom of Bahrain

1,200 market leaders. 45 countries. 1 Gathering: WIBC 2009
The World’s Largest Gathering of Islamic Finance Leaders

An Iconic Brand Launched in 1994, The World Islamic Banking Conference
(WIBC) has become an iconic brand internationally recognised as the largest
and most significant gathering of Islamic banking and finance leaders anywhere
in the world. The 16th Annual WIBC will be held on the 6th, 7th & 8th of
December 2009 at the Gulf Hotel in Bahrain.

Unique features of WIBC
• 16 years of extraordinary success and growth as a result of meeting the
business needs of the market leaders
• The world’s largest gathering of Islamic finance leaders: More than
1,200 industry leaders from over 45 countries attend WIBC each year
• More than 60 partners, sponsors and exhibitors representing almost
every market leader in the global Islamic finance industry
• The WIBC McKinsey Competitiveness Report – a critical reference
resource for industry decision-makers, providing unique strategic
insights
69


• The ‘World Comes to WIBC' initiative – Strategic partnerships with the
Central Bank of Bahrain, UK Trade & Investment, and the Monetary
Authority of Singapore to bring the decision-makers together from the
most significant markets in the world
• A format that is so much more than just speeches – The WIBC Sidelines
is where international groups hold their AGMs, CEOs interact in Closed-
Door sessions, and the premium Business Lounge provides a genuinely
unique environment for optimising high-level onsite networking.

WIBC 2008 Key Highlights
• Launch of the WIBC McKinsey Competitiveness Report 2008/09
• The UK Pavilion 2008: High-Powered British Delegation comes to
WIBC
• Avoiding "The Final Crash": Keynote Address by Toby Birch
• The World Comes to WIBC: Focus on Italy, China, Japan, Singapore,
France and UK

• United Arab Emirates

According to the CEO of Sharjah Islamic Bank (formally a
conventional bank, known as National Bank of Sharjah), the
majority of conventional banks in UAE wll convert to Islamic banks
within 10 years. Indeed, the demand for Shari'ah compliant services
in strong the Emirates.

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• Market Size

Islamic banking industry has increased its share of total bank assets, from
8.8% in 2002 to 13.4% in 2008.UAE share of the overall Islamic banking
market is 33 per cent, according to Alpen Capital. Strong government support
for Islamic banking, with a solid regulatory environment developed.

• Key Developments

Jul. 2008: Abu Dhabi University signs a memorandum of understanding with
International Centre for Education in Islamic Finance of Malaysia (INCIEF),
with the objective of providing training and development for the industry.Jun.
2008:

Dubai’s International Financial Centre Authority (DIFC) pushes for more
transparency from scholars. This follows comments by Accounting and
Auditing Organisation for Islamic Financial Institutions (AAOIFI) that 85 per
cent of Islamic bonds do not conform to Shari'ah principles.May. 2008:
Citigroup confirmed that it was in the process of launching a series Shari'ah
compliant products, aimed at the corporate market.Mar. 2008: UAE plans to
centralise zakat management, with the Zakat Fund playing an import role in this
project.

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Ch.10 Islamic Banking 'Resistant to Crisis'

London, 2009 Feb 28, Press TV

Islamic financial institutions are less vulnerable
to the world financial crisis due to their interest policies,
says rating agency S&P. Standard & Poor credit analyst
Mohamed Damak said in a Friday statement that Islamic
financial and insurance companies in the Persian Gulf
are more resistant to the economic downturn as Islamic
law prohibits investments in interest-based financial
products. "IFIs (Islamic financial institutions) didn't
invest in the structured products that have hampered many conventional banks'
financial profiles and performance," he said. "Most IFIs should be equipped to
weather the financial downturn and keep the effects on their financial profiles at
manageable levels." The report said Islamic insurance companies will be
resilient to the toughening market environment because of "sufficient liquidity
flows".

S&P had warned in its Wednesday report that IFIs would face a
significant hit on profits if real estate prices continue to fall in the Middle East.
The direct IFI exposure to real estate assets in 2008 reached 20 percent of total
loans, making them vulnerable to an ongoing correction in the previously fast-
growing sector, the agency said. In 2008, the Islamic banking industry issued
less Islamic bonds, or sukuk. The amount of its issued bonds dropped to
US$14.9 billion from more than US$34.3 billion a year earlier.

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• Islamic banking escapes fallout

Kuala Lumpur, 2008 Oct 20, IRIB

Islamic banking has largely escaped the fallout from the global financial
crisis, thanks to rules that forbid the sort of risky business that is felling
mainstream institutions. But experts say that because of its heavy reliance on
property investments and private equity, the booming US$1.0 trillion global
industry could be hit if the turmoil worsens and real assets start to crumble,
according to a report by AFP. "In the current financial turmoil, it is interesting
to note that Islamic financing may have prevented a majority of the mess created
by the conventional banking and financial institutions," Kuwait Finance House
said in a report. "The outlook for Islamic financing is bright and will likely take
the lead in terms of providing funding for major projects as the conventional
banking system re-evaluates its business model."

The rules of Islamic banking and finance -- which incorporate principles of
sharia or Islamic law -- read like a how-to guide on avoiding the kind of disaster
that is currently gripping world markets. Islamic law prohibits the payment and
collection of interest, which is seen as a form of gambling, so highly complex

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instruments such as derivatives and other creative accounting practices are
banned. Transactions must be backed by real assets -- not shady repackaged
subprime mortgages -- and because risk is shared between the bank and the
depositor there is an incentive for the institutions to ensure the deal is sound.
Investors have a right to know how their funds are being used, and the sector is
overseen by dedicated supervisory boards as well as the usual national
regulatory authorities.

A recent example is the mainly Muslim nation of Kazakhstan in which 3-
4 Islamic banks are planning to set up operations soon. Special attention should
be paid to China. The China Banking Regulatory Commission had given
approval to a pilot project of Bank of Ningxia to undertake Islamic financial
services in the People's Republic of China. Even African countries like Nigeria
or Senegal trying now to expand their Islamic Finance systems. In March 2009,
a framework for non-interest banking was released by the Central Bank of
Nigeria. More examples could be named.However many of these countries are
not yet ready to offer Shariah-compliant banking services as they either lack
human resources, expertise or the economical and political framework to do so.
According to Dr. Al Jarhi, President of the International Association for Islamic
Economics, '...one of the most serious challenges is represented in the need for
set standards and criteria for the governance of Shariah boards at IslaReceive.

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• The Rise of Islamic Banking in a Time of Economic Crisis

By Thomas K. Grose
Posted December 10, 2008

Shopping for a business loan during a global credit crisis is tough work even
if you're a fast-growing start-up like Ireland's Blue Ocean Wireless. And the
scrutiny can cut both ways. Blue Ocean, which supplies wireless
communications for merchant shipping, was giving a closer-than-normal look at
whether possible lenders could be counted on amid the ongoing financial
shakeout.People walk past the first Islamic Bank of Britain in London, England.

When the company got a $25 million loan this fall, it came from what might
seem an unusual source: the Bank of London and the Middle East, or BLME,
which strictly follows Islamic sharia law rather than conventional western
banking practices. Islamic banking requires transactions be structured in
alternative ways since the rules ban interest and trading in debt. Blue Ocean is

76


one of many European companies benefiting from a surge in Islamic financing
that's pushing sharia-compliant banking into the mainstream and extending its
appeal to non-Muslims. The sector's growth comes at a time when the western
banking system is caught in a liquidity crisis. Blue Ocean took comfort in the
fact that BLME draws on the petrodollar surpluses of Persian Gulf oil
producers. "The liquidity was there," says Blue Ocean's chief financial officer.

The boom in Islamic banking is providing a crescent-shaped sliver of good
news for the City, London's beleaguered financial district. It's fast becoming the
main hub of Islamic banking outside the Middle East, a development
encouraged by Britain's Labor government, which laid out the welcome mat to
sharia-compliant banks several years ago. "The government sees it as another
way to draw business to London, to bring investors to the U.K.," says Duncan
McKenzie, director of economics at International Financial Services London.

Growth field. London now is home to 25 companies offering some form of
Islamic financing. BLME is the largest of five wholly sharia-compliant banks
operating in Britain. The first, the Islamic Bank of Britain, opened in 2004, and
the number is expected to double within five years. Moreover, most of Britain's
conventional banks also have established "Islamic windows," units that offer
sharia-compliant products. Globally, the sector's total assets are pegged at
between $500 billion and $1 trillion and growing at a rate of 10 to 15 percent a
year.

Certainly, business is brisk at Kuwaiti-owned BLME, which is somewhat
ironic, given that it opened its doors in July 2007, on the eve of the banking
crisis. It is just completing a big leasing project for a major transportation
company, and other deals it has sealed this year include financing for apartment
buildings and a language school in London. It also provided an $11 million loan

77


to RecovCo, a British aluminum reprocessor that is expanding its operations in
France. For the first six months of this year, BLME reported pretax profits of
$2.7 million and its assets more than doubled, to $931 million.

The basic concepts of Islamic banking go back 1,400 years, but the world's
first modern Islamic bank didn't open until 1975. And the sector didn't really
blossom until five years ago, when it was buoyed by rising oil prices and the
strengthening economies of Asia's Muslim countries. Sharia law prohibits
investing in certain industries or products, including alcohol, tobacco, pork, and
pornography. The Koran also forbids usury, so financial transactions are
structured to rely on income in the form of rents or profits from the loan,
technically not interest.

Sukuks, for instance, are a type of Islamic bond backed by ownership of a
tangible asset that produces a financial return. Another popular instrument is the
commodity murabaha, essentially cost-plus financing, which involves the sale
and repurchase of a commodity to fund a loan.

The financing BLME arranged for Blue Ocean, for example, was a commodity
murabaha. Here's how it worked: The amount of the first portion that Blue
Ocean wanted from its $25 million loan arrangement was relatively small. So an
appropriate, low-cost commodity was selected to accommodate the transaction,
in this case special high-grade zinc. The bank purchased the commodity—an
amount equal to the cash Blue Ocean wanted to withdraw—then sold it at a
small profit to the company for the same price on a deferred payment basis.
Blue Ocean, with the bank's assistance, then resold the metal at the original
purchase price, thus raising the cash it wanted. All transactions occurred nearly
simultaneously so that the deal wasn't whipsawed by market price fluctuations.

Conservative approach. Islamic banks have avoided the subprime fiasco.
"There are no toxic assets," says Natalie Schoon, BLME's head of product

78


development. "As a result, there are no problems with big write-offs. One of the
advantages that the Islamic sector has as a whole is that there is still liquidity."
That, as well as the conservative nature of its business model, is a big reason
that it's attracting more non-Muslim clients. Middle Eastern investors have
amassed so many petrodollars they have no choice but to look for opportunities
beyond the Persian Gulf region, particularly in the politically stable
environments of the United Kingdom and Europe. That's why Islamic banks are
setting up operations there. Also, London is attracting those outposts because of
Britain's historical links to the region and the strong financial talent pool to draw
on. In fact, most of the top executives at the Islamic banks in London are British
or European, and they are old hands in City banking. The government's
concerted wooing efforts have also helped. "The government is actually
supporting Islamic finance," Schoon says. "It's not seen as a threat; it's seen as
an opportunity."

As with traditional banks, the Islamic banks in London must meet levels of
transparency sometimes lacking in other parts of the world. "Regulation is
important," Schoon explains. "Investors like the fact that you are regulated."
The London Stock Exchange began listing sukuks this year, and 18 are now
trading there, a useful increase of liquidity. The British government, as early as
next year, is expected to make the country the first in the West to issue its own
sovereign sukuks to raise as much as $3 billion. That should help set a
benchmark price and encourage more banks to issue the bonds.

The government's sukuks, which would be the first in the world to be triple-A
rated, would also give the United Kingdom an alternative route to raise money
from the oil-rich Middle East. The plan is not without critics, however, who
claim the government is giving religious-based sharia law official standing.
Critics also raise concerns that sukuks could be used to finance terrorism. But
Rodney Wilson, an expert on Islamic finance at Durham University, says that's
an unlikely scenario. "Most Gulf banks do have fairly sophisticated monitoring

79


systems in place" to ferret out money-laundering, terrorism, or other abuses,
Wilson says. The 9/11 terrorists, he notes, used western banks to finance their
operations.

A more practical problem is a lack of product standardization. Sharia-
compliant financing relies on Islamic scholars to determine if products are in
accordance with the Koran. But definitions of what is acceptable can vary
greatly, not only from region to region but from bank to bank. Typically,
Malaysian scholars tend to offer more flexible interpretations of sharia law than
do their counterparts in the Gulf. Each bank has its own board of scholars, and
even among the London banks there's no uniformity. Schoon says she's seen
deals arranged by rival London banks that BLME's board—which comprises
two scholars from the Gulf and two from Asia—would have vetoed.

BLME's toxic-free balance sheet helped convince Blue Ocean's board that,
despite being a new bank, it was fundamentally strong.

Ch.11 Islamic banking, future of financial industry

Jakarta, 2009 May 26, IRIB

80


By withstanding this global financial crisis and demonstrating a return to
growth, the Islamic banking industry is proving to everybody that it is the future
of the financial industry.Some international economists have called for making
use of Islamic banking system to solve economic problems, Asharq al-Awsat
newspaper reported. Addressing the international conference on "Islamic
Economy" recently held in Jakarta, the Indonesian President Susilo Bambang
Yudhoyono stressed that many Westerners, now and after the international
financial crisis were completely ready to accept and make use of the Islamic
banking system. According to a Standard Poor report issued in April 2009, the
global market indexes that are compatible with the provisions of Islamic Shariaa
law perform better than conventional market indexes. The sukuk market is also
beginning to pick up again following the sharp decline it suffered in 2008 which
saw loses of over 54 percent from the year before. The Indonesian government
has sold sukuk bonds totalling 650 million dollars at an initial interest rate of 8.8
percent after reducing this from 9.25 percent as a result of the demand from
investors.

The Islamic Development Bank also intends to issue sukuk bonds this
year worth one billion dollars. It is expected that by the end of the year the
overall value of sukuk bonds issued will reach an estimated 10 billion dollars.

.As for the growth of the Islamic banking industry as a whole, this industry is
still -despite the crisis - developing at an annual rate of between 15 and 20
percent, according to a statement by the Chief Executive of an Islamic bank
affiliated to Standard Chartered Bank. The Islamic banking industry is also on
the threshold of geographic expansion, and the crisis has opened up new
markets to this industry, for example France, where the Dallah Albaraka group
intends to open the first Islamic bank in the country later this year. According to
Paris Europlace, for the first time in history, Islamic sukuk bonds valuing 1.3
billion Euros will also be issued in France this year. Iran's Bank Melli tops the
list of best 500 Islamic financial foundations that was published by The Banker

81


magazine in November 2008 and republished in the report of the international
financial services committee.

The Islamic Republic of Iran owns six of ten foundations compatible with
the Islamic Shariaa and twice such capitals owned by any other country. By
withstanding this global financial crisis and demonstrating a return to growth,
the Islamic banking industry is proving to everybody that it is the future of the
financial ind

82


• The World’s Safest Banks

In a global economy that has been plagued by troubles in the world’s
financial systems, the words “safe” and “bank” are rarely put together. The
shakeup of banking systems around the world raises the question: "Which banks
are the safe banks?" These rankings are being published first on CNBC.com.

For the past 18 years, Global Finance has produced a list of the World’s 50
Safest Banks, and as the markets move away from their March lows, many
banks remain a point of market uncertainty, and long-term safety is of key
interest. This ranking of safe banks was created through the comparison of long-
term credit ratings (from Moody’s Standard & Poor’s and Fitch) and analysis of
total assets owned by the 500 largest banks in the world.

For ease of comparison, we’ve listed the highest ranking bank in each country,

83


as well as key statistics for each country’s banking system. The size of the
banking system was determined by value of assets held by the country's banks.

84


The scholar strained in religious studies has adequate training contracts based
upon the interpretations of legal schools in Islam. There are plenty of resources
in this regard since Arabic studies and religious studies have been adequately
catered for in major universities. However, training in banking, finance and
insurance remains inadequate. In 2006, a body has been formed (INCEIF for
International Centre for Education.

85


86


Conclusion

At present the future of the global economy is starting to take shape. The
eastern economic theory has been blocked by the existing reality and
experienced major problems in terms of the lack of productivity, unemployment
and balance of payment deficit. On the other hand, the western theory is not
better off than the eastern theory. In the midst of these two conflicting theories,
there has emerged the Islamic economic theory has emerged the Islamic
economic theory reflecting the tolerance of Islam and its practical suitability for
the conditions of life and the innate nature of mankind, promising a brighter
economic future that is free of discrimination and exploitation and that is
immune from the prejudices of political influences. It is anticipated that this new
just system will find its way to replace the other economic systems, simply
because the Islamic economic system does not agree with the existing man-
made systems and cannot co-exist with them.

Anyone who traces the attempts to introduce the Islamic economic
system at the present time will note that they have moved from the stage of
complete despair in the practicality of applying divine economic laws to the
stage of exerting concerted efforts for Islamization of the western economic
system. At certain times, there were attempts to put the western economic
system in an Islamic disguise without changing its essence or even exploring the
reasons for dealing with such system.

Then came a brighter stage with the establishment of Islamic banks
which came to negate and oppose all the previously adopted principles and
beliefs. These institutions started with commitment and determination to
endorse the Islamic economic system, seeking to apply divine principles in the
areas of economy and finance. It is noteworthy that these banks have been met
with a vehement criticism and claims casting doubts over their success.
However, these campaigns were soon silenced when it was concretely proved to

87


everyone that these banks were established with the firm belief in applying the
true principles of Islamic Sharia. These institutions have proved to the World
that there could be errors in application but once they become aware of such
shortcomings they will soon return to the right path, seeking forgiveness from
God the Almighty.
Meanwhile, a lot of interest has been shown in Islamic banking from
several nations and many people. Once the success of Islamic banks became
evident in actual practice, Islamic and non-Islamic academic institutes took
interest in investigating this newly emerging trend. They even went further to
envisage a more devout world committed to embracing the principles of Islam.
We do have hundreds of studies and research works, some of which are
intended as postgraduate these, examining the successful trend of Islamic
banking.

Expected is a gradual and natural development towards the successful
application of Islamic banking in a world that is gradually heading towards the
application of Islamic economy in terms of its concepts and content. In this
context, what is reassuring for us is the firm determination of the elite of
Muslim intellectuals and the rational application of the principles of Islamic
economy by those who are enthusiastically committed to its success.

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BIBILOGRAGPHY

Books
Aggarwal, Rajesh K., and Tarek Yusoff, 2000, “Islamic Banks and
Investment Financing,” Journal of Money, Credit

Ariff, M., 2006, “Islamic Banking in Southeast Asia: A comparative
Study of Performance,” Research paper presented

Abdul latif janahi 1995 “Islamic Banking concept and Practice &
Future”.
Website

www.islamicbanking.com.

www.IRF.in.

www.wdibf.com

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